Tax in the UK

An Expert's View about Business Administration in the United Kingdom

Posted on: 30 Aug 2010

This fact sheet summarises key aspects UK taxation.

TAX This information sheet summarises the key aspects of tax in the UK. The factors covered are: 1. Business taxation 2. Personal taxation 3. Indirect taxation 4. The UK ? an internationally competitive tax location 5. Further information It is essential that companies take appropriate professional advice on taxation when operating in the UK. For more information on UK tax and accountancy firms please see Appendix A. The UK is an internationally competitive location for tax, with several key advantages for businesses and individuals including: ? one of the lowest main corporate tax rates in the European Union, ? generous tax allowances (such as the availability of research and development tax credits) and no local taxes on profits or surpluses, ? the most extensive network of double taxation treaties in the world, and ? competitive personal taxes and low social welfare contributions. 1. BUSINESS TAXATION The key business taxation issues summarised in this section are: a) Corporate tax rates b) Capital allowances c) Tax credits for research and development d) Employer social security costs e) Approved and tax-favoured share plans a) Corporate tax rates The ?standard? or ?main? rate of corporation tax in the UK is 28 per cent and applies to both resident and non-resident companies. The specific rates for UK corporation tax are detailed in Figure 1. Marginal relief is applied to profits between the various rates, easing the transition between the small companies? rate and the main rate. For further information please see: www.hmrc.gov.uk/rates/corp.htm Figure 1: UK corporation tax rates 2010/11 Rate Profit (£) Small companies? 0?300,000 rate 21% Marginal relief 300,001?1,500,000 Main rate 28% 1,500,001 or more Source: HM Revenue & Customs, 2010 Since July 2009, the majority of UK-based companies benefit from an exemption from corporation tax for any foreign dividends that they receive. Figure 2 shows that the UK?s main corporate tax rate is competitive, not only in Europe, but also worldwide. Figure 2: Main corporate tax rates - international comparison* Country Tax Rate India 42.23%** Japan 41% US 39.5% France 34.43% Canada 28% to 34% Belgium 33.99% Germany 30% to 33% Spain 30.00% Australia 30.00% Luxembourg 28.59% UK 28.00% Sweden 26.30% Netherlands 25.50% China 25.00% Denmark 25.00% Austria 25.00% Ireland 12.50% Source: Deloitte, 2010 *Note: Effective corporate tax rates. The rates do not reflect payroll taxes, social security taxes, net wealth taxes, turnover/sales taxes and other taxes not levied on income. ** For non-resident companies. b) Capital Allowances The UK has an extensive range of capital allowances that allow the costs of capital assets to be written off against taxable profits. For further information, please see: www.hmrc.gov.uk/capital_allowances/investmentschemes.htm c) Tax credits for research and development Research and development (R&D) tax credits are available for large corporations and SMEs investing in R&D: ? Large corporations R&D In addition to the normal 100 per cent deduction, large companies are entitled to a further deduction from their taxable income of 30 per cent of their current spending on qualifying R&D. For example, if a company spends £100,000 on qualifying R&D, it will be able to deduct £100,000 from its taxable income under ordinary tax rules and an additional £30,000 under the R&D tax credit. ? SMEs R&D In addition to the normal 100 per cent deduction, SMEs are entitled to a further deduction from their taxable income of 75 per cent of their current spending on qualifying R&D (for the purposes of this scheme only, an SME is defined as a company employing up to 500 people). Guidelines on the definition of research and development for tax purposes are available at: www.hmrc.gov.uk/manuals/cirdmanual/CIRD81900.htm Further information on R&D tax credits, including details of claim procedures, can be found at: www.hmrc.gov.uk/randd/ d) Employer social security costs For 2010/11, the rate for an employer?s ?National Insurance Contributions? (NIC) on the earnings of each individual employee (earning over £110 per week) is 12.8 per cent, with no upper limit. Employees pay NIC on the part of their earnings which falls between £110.01 and £844 per week at a rate of 11 per cent, while employees paid more than £844 per week will pay NIC at 1 per cent on all earnings above that figure, with no upper limit. For further information on NIC please see: www.hmrc.gov.uk/employers/rates_and_limits.htm Employers pay less social security contributions in the UK than in most other European countries (see Figure 3). Figure 3: Employer social security costs in selected European countries (highest rate) 45 40 35 30 25 % 41.7 20 35 34.55 32.42 32.08 15 30.15 29 23.75 10 19.51 12.8 10.75 5 0 Source: OECD, 2010. e) Approved and tax-favoured share plans The UK Government actively supports small companies, entrepreneurs and an innovative business environment by encouraging the granting of stock/share options. There are several specific schemes employers can utilise to reward employees, such as: ? the Enterprise Management Incentive, ? the Share Incentive Plan, ? Save as You Earn, and ? Approved Company Share Option Plans. Please see Appendix B for more information about each of these schemes. 2. PERSONAL TAXATION The key personal taxation issues summarised in this section are: a) Personal tax rates and allowances b) Capital gains tax a) Personal tax rates and allowances UK residents typically pay tax on all worldwide income. An individual qualifies as a UK resident if: ? they spend 183 days or more in the UK in any tax year (the tax year runs from 6 April to 5 April), ? they have an intention to stay in the UK for at least two years, or ? they make regular visits to the UK, averaging at least 91 days per tax year over a maximum of four years. Individuals resident but not domiciled in the UK only pay tax on overseas income if it is brought into the UK. If an individual has been resident in the UK for at least seven of the last 10 tax years, they must pay an annual levy of £30,000 or pay UK tax on their entire worldwide income. The exception is income arising in the Irish Republic, which is taxable regardless of whether it is brought into the UK. Individuals not resident in the UK only pay UK tax on their UK income. All UK residents are entitled to the ?basic personal allowance?. This is an amount of income on which an individual does not have to pay any tax. For 2010/11, the basic personal allowance is £6,475. Other reliefs and allowances may be available, depending on individual circumstances. The income tax payable above the level of the basic personal allowance is shown in Figure 4. Figure 4: Taxable bands above the basic personal allowance 2010/11 Personal Tax Rate Amount earned over the basic allowance Basic Rate 20% £0 to £37,400 Higher Rate 40% £37,401 to £150,000 Additional rate 50% £150,001 and above Source: HM Revenue & Customs, 2010. In addition, from April 2010, the basic personal allowance reduces by £1 for every £2 of earnings above £100,000 (the basic personal allowance, therefore, becomes nil for earnings above £112,950). For further information on personal tax rates in the UK please see: www.hmrc.gov.uk/rates/it.htm b) Capital gains tax Capital gains tax (CGT) is a tax payable by individuals, personal representatives and trustees on the disposal of an asset or upon receipt of money in respect of an asset. The amount of CGT is based on the gains made on disposals of assets and capital sums received from assets in the tax year. For the tax year 2010/11, individuals are exempt from CGT on the first £10,100 of profits made from the sale of an asset. The rate of CGT is 18 per cent for the tax year 2010/11, although individuals may qualify for various forms of relief that reduce or defer chargeable gains, such as ?entrepreneurs? relief? which allows the first £2 million of gains that qualify for relief to be charged at an effective rate of 10 per cent (an individual is able to make claims for relief on more than one occasion, up to a lifetime total of £2 million of gains). For further information please see: www.hmrc.gov.uk/cgt/index.htm and www.hmrc.gov.uk/cgt/disposal.htm 3. INDIRECT TAXATION Value added tax (VAT) is due on supplies of goods and services which are made in the UK by a taxable person who is registered for VAT, and also on the importation and acquisition of goods and some services (other than exempt supplies). In the UK, VAT is a charge that companies need to make to customers if: ? they supply goods or services in the UK or Isle of Man, and ? the taxable turnover is above, or expected to be above, the registration threshold, which is currently £70,000. There are three rates of UK VAT: ? the ?Standard Rate? (17.5 per cent) applies to most goods, ? the ?Reduced Rate? (5 per cent) applies to fuel and power used in the home and by charities, and ? the ?Zero Rate? (0 per cent) applies to a limited range of goods and services (including most food, books and clothing for young children). Once a company is VAT-registered, it will be able to claim back any VAT charged to it on business-related goods or services. Some business supplies are not subject to any VAT. These exempt supplies do not form part of a company?s taxable turnover. Examples include: ? selling, leasing and letting land and buildings (except lettings of garages, parking spaces or hotel and holiday accommodation), ? insurance, ? betting, gambling and lotteries providing credit, ? selected education and training activities, and ? subscriptions to selected membership organisations. The levels of VAT in the UK are competitive in comparison with other European countries, as is highlighted in Figure 6. Figure 6: VAT rates in selected European countries 30 25 20 % 15 25 25 22 21 21 10 20 20 20 19.6 19 19 17.5 16 5 0 Source: European Commission, 2010 Further help and advice on VAT is available at the HM Revenue & Customs website: www.hmrc.gov.uk 4. THE UK ? AN INTERNATIONALLY COMPETITIVE TAX LOCATION The key international taxation issues summarised in this section are: a) Overall international tax comparisons b) Tax treaties a) Overall international tax comparisons Figure 7 details an index of various types of taxation in major countries. The index is based on the top marginal rate in each of the categories shown and demonstrates that the UK is a highly competitive location for taxation. Figure 7: Tax Misery Index 2009 France 34.4 52.1 45 15 19.6 1.8 Belgium 34 53.5 34.8 13.1 21 0 Sweden 26.3 61 31.4 7 25 0 Netherlands 25.5 52 18.8 31.2 19 0 Italy 31.4 42.3 35 10 20 0.7 Spain 30 43 30.2 6.4 16 0 Portugal 26.5 42 23.8 11 20 0 Japan 41 50 13.7 12.9 5 0 Germany 30 47.5 12 12 19 0 (Berlin) US (New 46.2 45.5 7.7 7.7 8.4 0 York) Switzerland 27.1 42.6 17.1 16.1 7.6 0.7 (Zurich) Luxembourg 28.6 39 13.8 12.4 15 0 United 28 40 12.8 11 15 0 Kingdom Canada 32 46.4 7.4 6.7 13 0 (Ontario) Ireland 12.5 44 10.8 6 21.5 0 Singapore 17 20 14.5 20 7 0 0 20 40 60 80 100 120 140 160 180 Corporate Income Personal Income Employer Social Security Employee Social Security VAT Wealth Tax Source: Forbes Magazine Tax Misery Index, 2009 b) International tax treaties The UK has concluded over 100 tax treaties for the avoidance of double taxation and has the largest network of treaties globally (Source: HM Revenue & Customs, 2010). An important feature of many treaties is a reduced rate for withholding tax on the payment of dividends, interest and royalties. A full list of treaties can be found at: www.hmrc.gov.uk/international/treaties1.htm 5. FURTHER INFORMATION This information sheet was updated in March 2010. As information changes from time to time, please contact the organisations listed or UK Trade & Investment to confirm any item that you intend to rely on. This information sheet was produced by the Marketing Group of: UK Trade & Investment 9th Floor Kingsgate House 66-74 Victoria Street London SW1E 6SW Tel: +44 (0)20 7215 4957 Email: enquiries@uktradeinvest.gov.uk Website: www.uktradeinvest.gov.uk APPENDIX A Contact details for accountancy firms England and Wales: The Institute of Chartered Accountants in England & Wales Chartered Accountants Hall Moorgate Place London EC2R 6EA Tel: +44 (0)20 7920 8100 Website: www.icaew.co.uk Association of Chartered Certified Accountants 29 Lincoln's Inn Fields London WC2A 3EE Tel: +44 (0)20 7059 5000 Website: www.accaglobal.com/ Scotland: The Institute of Chartered Accountants of Scotland CA House 21 Haymarket Yards Edinburgh EH12 5BH Tel: +44 (0)131 347 0100 Website: www.icas.org.uk Northern Ireland: The Institute of Chartered Accountants in Ireland The Linenhall 32-38 Linenhall Street Belfast BT2 8BG Tel: +44 (0)289 043 5840 Website: www.icai.ie APPENDIX B Approved and tax-favoured share plans a) The Enterprise Management Incentive, for companies with less than 250 employees, is designed to assist companies to recruit and reward their employees. The specific features of this scheme are: ? no formal approval is required, ? the maximum value of shares over which unexercised options exist is not to exceed £3 million per company, ? the maximum value of unexercised qualifying options in one company or group is £120,000 per eligible employee, ? there is no tax or NIC on the granting of the option, ? there is no tax or NIC on exercising the option, if the exercise price is at least market value at the date of grant, ? the sale of shares is subject to capital gains tax, and ? shares qualify for taper relief from the date the options are granted. Further information can be found at: www.hmrc.gov.uk/shareschemes/emi-new-guidance.htm b) The Share Incentive Plan (SIP) is a tax and NIC advantageous plan for all employees in a company. The benefits of a SIP are that employees can reduce tax and NIC contributions that they would otherwise have to make on the acquisition of shares. Specific features of a SIP are: ? there are three types of share (free shares, partnership shares or matching shares) which can be used alone or in any combination, ? employees can be provided with free shares up to the value of £3,000 per year, ? employees can use up to £1,500 per year out of pre-tax and pre-NIC pay to buy partnership shares, ? employers can provide employees with matching shares, at a ratio of two matching shares for each partnership share bought by the employee, ? companies can also allow employees to use up to £1,500 per year of dividends from the SIP to buy further shares, and ? the plan must be approved by the HM Revenue & Customs and will apply to qualifying employees only. Further information can be found at: www.hmrc.gov.uk/shareschemes/sip_employers.htm c) The Save as You Earn scheme is also known as Savings Related Share Options. This is an HM Revenue & Customs approved scheme aimed at employees and directors which: ? must be available to all employees, ? allows savings of between £5 and £250 per month, ? allows for shares to be purchased tax and NIC free at the end of three, five and seven year intervals, and ? interest received or bonuses granted are tax-free. Further information can be found at: www.hmrc.gov.uk/manuals/ersmmanual/ERSM302100.htm d) Approved Company Share Option Plans can be provided to specific employees and directors. Features of this scheme include: ? the maximum value of shares under option is £30,000, ? the exercise price must be close to market value of shares at the time of grant, and ? no tax or NIC on grant or exercise if the option is exercised between three to ten years after grant. Further information can be found at: www.hmrc.gov.uk/manuals/essum/essum40000.htm
Posted: 30 August 2010

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